It has always been difficult to select investments that meet an investor’s desire to be ‘ethical’. This is often because ethics are essentially part of a belief system so highly personal. But it is also because investing in a company that does something you personally think is ‘good’ (for example making cosmetics that are not tested on animals and which uses ingredients sourced with due regard for the environment) does not mean that the company is not avoiding taxes using complex offshore trusts, paying fair wages and so on. A business has to be checked out in several ways before we can feel comfortable with it, if we want to invest in line with our conscience.
This issue has been on the agenda of fund managers and investment advisers for quite a while and various methods have been used to label and filter companies as suitable for investors who have reservations about investing on grounds of their religious or ethical beliefs. Much of the early work was driven by religious investors and indeed the now taken over and vanished Friends Provident business was set up by Quakers and ran one of the first ever set of ethically filtered investment funds under the Stewardship brand.
Over the years labels such as Green (in various shades), ethical, SRI (socially responsible investing) and more recently ESG (environment, social and governance) have been applied, A variation of ESG could also be Ethical Sustainable and Governance but the Americans have formalised the former usage. Governance refers to corporate governance meaning the way the board of directors decides to interact with stakeholders, like shareholders, employees, governments and even the environment.
The research organisation Morningstar added an ESG rating to its fund research process a couple of years ago and that has its own particular assessment criteria. It is useful for advisers and as a starting point for research but it will not tell you if the fund meets your personal requirements.
The only way you can build a portfolio that gets close to meeting your personal ethical or religious requirements is to work out exactly what you won’t like your money to be supporting (like cigarette manufacturing or armaments production, for example). If you have an adviser, you need to have a long discussion with them on the subject so they get to understand your views.
It is then possible to filter out most of the investment funds in the market, because most will invest in major dividend paying businesses like tobacco, gambling and the production of weapons that the majority of people with strict ethical concerns won’t like . Of those that are left, you need to get some understanding of what they do allow as holdings and how they carry out their research. Remember even august bodies like the Church of England got caught out investing in companies like Wonga.com!
The personal track record and attitude of the fund managers which will be known to a competent adviser will be highly relevant data as will the specific objectives set by the fund management group.
A final word in this introduction to a complex issue is that investors must be realistic: investment in shares via collective funds means being a small scale capitalist so your objectives (making a return from the profits of the company whose shares you own) will be in tension with the interests of the employees and customers of that company who want to have better wages and lower prices for better quality products – which reduces profits. It amuses me to hear people I know roundly condemning RyanAir whilst enjoying the returns coming through to their European investment fund from RyanAir’s excellent profit generation!
